If you build it, will they come?

Tesla Motors is building a network of recharging stations, similar to gasoline retail stations, only in areas where their customers want to go. Charging is free for Tesla customers and takes about half hour. The total cost of a recharging station is $250,000. On the other hand, Better Place, an electric car infrastructure company, decided to pursue a different path. Instead of recharging, drivers could swap out the depleted batteries at Better Place’s stations for fresh batteries in matter of minutes so that customers do not have to wait for inordinately long times for charging. Each battery switch station costs $500,000.

Which model has delivered early results? While Tesla Motors has announced that it has paid back its loan from the U.S. government nine years early. Better Place has filed for bankruptcy. It turns out that Better Place executives could not persuade any automaker except Renault to design swappable batteries compatible with Better Place. Even after Better Place built its stations, customers did not come.

What are some lessons for managers? Ask the question: what is the job that the customer has hired an electric car to do? Reducing air pollution, decreasing CO2 emission, feeling eco-friendly may be reasons but long distance trips would not have been on the top of the list. Look at the statistics. 50% of cars in the U.S. travel under 25 miles a day and these drivers can charge their vehicles at home. An electric car buyer today understands that the battery has limited range. A car that runs on gasoline or a hybrid car is a better bet for long distance travel given that refueling is fast and retail gas stations are abundant.

Second, is there an endowment effect in play? Endowment effect states that people get attached to objects that they own and find it hard to part with these objects. Since battery is an important component in a car, customers may get attached to their batteries, or at least some customers (especially the early buyers) may care for, and maintain, their batteries for better mileage and hence may be unwilling to part with these cells. If this is indeed so, battery swapping is a bad idea.

Third, battery is a component of an electric car. Battery placement designs need to be standardized for battery swaps to happen, a difficult proposition for car makers operating in an already uncertain electric car technology. As such, even if the electric car is successful, there is no guarantee that the battery-swap business model would be successful. Even if the electric car (with swappable battery technology) succeeds, the customer numbers are likely to be small in the beginning. Instead of absorbing huge capital costs in the beginning hoping demand would pick up, a better strategy for Better Place would have been to build battery swap stations slowly while establishing that there would be enough demand to justify it. Instead time just ran out.